The concept of modern world is imperfect without electricity. The
development of modern gadgets in past two decades has made human living
as reflection of a science fiction movie. The fiction like living's
axis in fact is electricity and without electricity every thing comes to
a grinding halt. Though this picture is portrait of the developed world,
yet everyone would agree that wherever electricity has reached, it has
transformed everything into power reliant. Whether it is Pakistan or any
third world country, the industry; the commerce; the banking system; the
methods of teaching in educational institutions; hospitals; control
systems of civil aviation and civic traffic systems; and the domestic
living, everything revolves around electricity. Whenever there is any
break in electricity supply, output of every segment of society drops
down to its lowest ebb. Many segments such as process industry and
hospitals require highly reliable power supply systems. Truly,
electricity is no more a luxury available to rich only; it has now
become a basic need.

However, scientists have not yet fully succeed in overcoming the
challenges posed by the dynamics of electricity. First of all their
failure to store electricity on commercial scale has made it necessary
to keep generating electricity all the time. However, managing the
generation quantum to meet the varying intra-day and inter-day power
demand at places which are hundreds of miles apart require dedicated and
sophisticated transmission and distribution infrastructure. The problem
accentuated in countries like Pakistan where the generation capacity
reduces in winter due to lower availability of its hydro power plants
and lower availability of gas for thermal generation plants.

The transmission cum distribution infrastructure as well as
installation cum operations of power generating plants is very capital
intensive. Hence it is very difficult for the governments and / or power
utilities to develop the generation capacity and the transmission cum
distribution network all by itself.

PRESENT POWER SCENARIO

Although Pakistan is an energy rich country but unfortunately the
rich energy sources i.e. vast hydel potential, Thar coal resources, etc.
have not been successfully exploited and only about 70 percent
population has access to electricity. Due to increase in consumers, non
realistic augmentation and lesser maintenance, high losses and
constraints have become integral part of the national grid. Unreliable
service and irrational tariff are the two hallmarks of our system.
Sluggish pace of power sector reforms and undue wait for privatisation
of different distribution companies have halted the improvement
processes therein. The staff has lost its motivation and many of the
distribution companies are on the verge of bankruptcy. The NTDC has
taken over the role of power purchaser replacing the vertically
integrated WAPDA. Financially and otherwise NTDC appears a dwarf in
comparison to gigantic WAPDA.

PLAYERS OF PAKISTAN'S POWER SECTOR

Before the advent of IPPs (commissioning started from 1997) power
business in Pakistan used to rest in two vertically integrated public
sector entities i.e. Pakistan Water and Power Development Authority
("WAPDA") and the Karachi Electricity Supply Corporation
("KESC"). WAPDA used to supply power to all of Pakistan,
except the metropolitan city of Karachi and some of its surrounding
areas which are still being supplied by KESC (though it has now been
privatised). WAPDA was also supported by Atomic Energy Commission
through two nuclear power plants in the country. Now WAPDA has been
unbundled and today WAPDA is in entity in existence for looking after
the public sector dams and power generated by those dams. The rest of
the carved out portion of WAPDA has been converted into following
corporatised entities;

* Four (4) thermal power Generation Companies (GENCOs);

* Nine (9) Distribution Companies (DISCOs); and

* One (1) National Transmission & Power Dispatch Company
(NTDC);

These corporatised entities will ultimately be privatised (except
NTDC) and at present are being managed by Government of Pakistan
exercised through Pakistan Electric Power Company (PEPCO).

For facilitation of IPPs there exist two organisations namely (a)
Private Power and Infrastructure Board (PPIB) (who has the honor of
bringing all commissioned IPPs in the country), and (b) Alternate Energy
Development Board (which will facilitate renewable energy based 1PPs)
Besides, a power regulator--National Electric Power Regulatory Authority
(NEPRA) is also operating in the country since 1997. Pakistan's
power sector is very complex and has a number of stakeholders as shown
in the diagram below:

[ILLUSTRATION OMITTED]

Besides, provinces/AJK also have some organisations working under
their administrative control for developing power generating units. One
such organisation is Thar Coal and Energy Board which has been
established solely to help develop power generation based on vast Thar
coal resources.

OVERVIEW OF PAKISTAN'S POWER SECTOR--GENERATION PATTERN

Pakistan's total installed power generation capacity is around
19886 MW. Out of which 8116 MW is from private sector and the rest is
through hydel facilities of WAPDA, thermal generation units of GENCOs in
PEPCO system and the two nuclear units.

In year 2007-08, 95860 GWh of electricity was generated primarily
through thermal fuels i.e. gas 34.3 percent and oil 32.1 percent. Hydel
percentage in total fuel was 29.9 percent. Unfortunately coal's
percentage remained very low at 0.1 percent.

Transmission System

In Pakistan hydropower potential is in the North and coal/gas
resources in the south so high voltage transmission lines run from North
to South there are about 4000 Km of 500 KV Transmission Line, in
addition there are 220 KV and 132 KV transmission lines.

[ILLUSTRATION OMITTED]

Challenges in Attracting Private Sector Investments in Power
Generation

As earlier mentioned developing new power generation plants is very
capital intensive. For simple gas based 5000 MW .thermal based capacity,
roughly US$ 5 billion are required. As gas availability after year 2012
is very bleak (as per current projections), Pakistan will have to rely
on hydel and Thar coal based power generation. The estimates for hydel
is too high subject their location, topography and soil conditions. For
Thar-coal-based thermal generation say 5000 MW we need to develop an
open cast mine of 30 million ton / annum production capacity. Developing
such huge mine per se is a big project requiring additional US$ 4 to 5
billions. These estimates do not include the huge investments required
to improve infrastructure (such as roads, communication channels etc.)
in areas where hydel potential and Thar exist. Arranging such funds by
public sector utilities (corporatised GENCOs) is difficult due to their
poor financial health which is turning worse from bad due to less
revenue recovery resulted from low purchasing power of consumers
(besides other factors such as high losses etc.). Therefore instead of
public sector projects reliance again has to be made on private sector.
However, private sectors' investment is very difficult--if not
impossible--for local investors. Hence there is need to attract foreign
investors as well. The unavailability of trained human resources in
sufficient numbers is also a barrier when investors start to think for
investing in Pakistan's power generation sector.

Private Power and Infrastructure Board

In 1993, the then Government constituted an Energy Task Force to
formulate comprehensive policy recommendations for the energy/power
sector. In March 1994, the Government announced its Private Power Policy
(the '1994 Policy'). The 1994 Policy was aimed at large-scale
induction of the private sector in power development. In this policy
framework, an internationally competitive package of incentives was
devised to attract foreign and domestic entrepreneurs to invest in power
generation projects. Procedures were simplified; steps were taken to
eliminate delays in dealings between the Government and the investors;
local currency investment requirements were reduced; and measures were
adopted to create and encourage a domestic corporate debt security
market.

As part of the Government's efforts to introduce major policy
reforms and structural changes in the power development sector, the
Private Power and Infrastructure Board (PPIB) was created in 1994. PPIB
provides "One-Window" facility to investors in the private
power sector by acting as a one stop organisation on behalf of all
ministries, departments and agencies of the GOP in matters relating to
the setting up of power projects in private sector. These matters
include negotiation of Implementation Agreement (IA), Power Purchase
Agreement (PPA), Fuel Supply Agreement (FSA), other related agreements,
and liaison with the concerned local and international agencies for
facilitating and expediting the progress of private sector projects.
PPIB is a purpose built institution to cater for the specific needs of
IPPs and has to interact with various stakeholders for timely
development of various private power projects.

[ILLUSTRATION OMITTED]

Pursuant to the 1994 Policy, PPIB issued thirty four (34) Letters
of Support (LOS) totaling 8,430 MW of net capacity. Ultimately, with the
active support of PPIB, nineteen (19) IPPs totaling 3,158 MW of net
capacity achieved Financial Close. Out of these 19 projects, fourteen
(14) reached to the successful commissioning. Besides these fourteen
IPPs HUBCO and KAPCO are the other two private sector power generation
plants in the country.

Given below is a summary of PPIB's multiple achievements made
thus far:

* Successfully implemented the 1994 Power Policy resulting in
foreign direct investment of about US$ 4 billion within three years.

* PPIB being repository of IPP knowledge provides full support to
Ministry of Water and Power on matters relating to power sector.

* Successfully handled arbitration and litigation cases with a
number of companies non-seriously handling the projects.

Power Generation Policy 2002

In late 2002 the Government of Pakistan launched a Power Generation
Policy embodying an attractive set of incentives for the investors. The
Policy provided a balanced regime spanning from concessionary duty of 5
percent on import of plant and equipment not locally made, to payment
Guarantee in case of default by the power purchaser. Some other features
of the Policy 2002 are given below:

* Exemption from corporate income tax, turn over tax and sales tax.

* Protection against Force Majeure, change in law, and change in
duties and taxes

The Policy provided a well defined mechanism of two part tariff
i.e. Energy Purchase Price (in Rs / kWh and linked with dispatch of the
plant) and Capacity Purchase Price (in Rs. /kW/ hour linked with hourly
availability of plant). NEPRA--the power regulator--also clarified some
aspects of tariff during the initial tariff determinations under Policy
2002.

[ILLUSTRATION OMITTED]

Process Pursuant to Policy 2002

Pursuant to Policy 2002 there are two distinct options for
investors. One is the Unsolicited Proposal option and the other is
Bidding Process. The initial response to Policy 2002 was that of the
unsolicited one; which in fact was the manifestation of its success. The
investors without being called for a specific project, kept approaching
PPIB for investment in projects based on all sorts of fuels i.e. oil,
gas, hydel, coal and bagasse. Recently PPIB has started relying only on
projects based on bidding.

The step wise process for unsolicited projects include
pre-qualification, issuance of letter of interest after receipt of
performance guarantee @ US$ 1000 / MW, conduct of feasibility study by
sponsors and monitoring thereof by PPIB trough a panel of experts,
tariff determination by NEPRA, issuance of Letter of Support (LOS) after
receipt of Performance Guarantee @ US$5000 / MW, signing of agreements,
financial close by the project company duly formed the sponsors,
construction, and testing and certification by independent engineers for
commissioning.

[ILLUSTRATION OMITTED]

The bidding process on the other hand is different from the
unsolicited up to the stage of LOS issuance. In solicited LOS issuance
precedes the selection of successful bidder; for which the process
starts by issuance of Request of Proposals, receipt and evaluation
through a two envelope method and tariff confirmation by NEPRA.

PPIB's Efforts for Attracting Investors

PPIB disseminated Power Policy by aggressive marketing through
seminars, workshops, personnel visits to identified prospective
investors, arranging road shows abroad and last but not the least by
publishing different reports such as Hydel Potential report and Coal
brochures.

PPIB's Project Portfolio / Initiatives of PPIB

In response to its vigorous efforts investors responded very
positively and PPIB has embarked upon new fast track initiatives besides
the normal track unsolicited projects. PPIB's portfolio now
consists of the following projects/initiatives:

Projects

* Unsolicited Projects (Oil / Gas).

* Fast Track Projects.

* Imported /Local Coal Projects.

* Hydro Power Projects.

* International Competitive Bidding for

--IPPs.

--Rentals (limited period say 3-5 years projects).

Initiatives

* Feasibility Studies for

--Hydro Projects.

--Isolated Gas Fields not connected with system of SNGPL/SSGC.

Response / Status

There is tremendous response from private sector. In all PPIB is
processing following forty seven projects with cumulative capacity of
12426 MW. From these PPIB issued LOIs to thirty six for 10 183 MW
cumulative capacity. Out of these thirty-six projects, fourteen projects
(with cumulative capacity of 2,831 MW) have advanced to the stage of
LOS. Twelve amongst them (cumulative capacity 2539 MW) have also
achieved financial close and Attock project at Morgah Rawalpindi has
achieved Commercial Operation on 17th March 2009.

CONCLUSION

As the power demand is continually growing and the huge quantum of
investments required would continue to grow into mammoth---creating
continuous investment opportunities for investors--PPIB will continue
its efforts to arrange demanded power in the country by providing best
facilitation to prospective investors through its team of highly trained
and experienced professionals.

N. A. Zuberi is Executive Director, Private Power and
Infrastructure Board, Government of Pakistan, Islamabad.